Evaluating Sanders’s Medicare for All Act of 2019, Part 4

Part 1 reviewed Title 1, which states that basically everyone will be covered and can receive care from pretty much any provider. Part 2 reviewed Title 2, which states that insurance benefits will be comprehensive without any regular out-of-pocket expenditures. Part 3 reviewed Titles 3 and 4, which lay down some provider standards and also some expectations regarding data reporting.

Ok let’s continue. I’ll try to make the less exciting stuff concise but still get through it so we have the foundation of understanding necessary to critically evaluate this bill.

Title 5

The Centers for Medicare & Medicaid Services (CMS) will be responsible for establishing and reviewing quality standards, such as clinical practice guidelines and other performance reviews and standards.

There’s also a section on health care disparities in here. Providers will be required to report data that help CMS evaluate health care disparities, and then those data have to be reported to Congress regularly.

I don’t have any commentary on this title.

Title 6

Ok this is an important one. It talks about establishing a national health budget. It requires a budget to be made that includes the cost of health services but also covers the cost of other components, including administration, quality assessment activities, innovation, and public health activities.

Interestingly, it says that up to 1% of the budget can be, for up to 5 years, allocated to support people whose health insurance-related jobs are displaced by the implementation of M4A. It will also have a “reserve fund,” which will be available to be used during health emergencies, such as natural disasters or pandemics. Yeah that’s probably a good idea!

The Secretary is responsible for establishing fee schedules for provider reimbursement. And the Secretary will also have to “establish, document, and make publicly available a standardized process for reviewing the relative values of physicians’ services. . . .” And then there are requirements added to make the Secretary accountable by requiring these efforts to be tracked and reported to Congress.

The U.S. Code Title 42 is where payments for physician services is discussed. This bill adjusts that a little bit to require the Secretary to make fee schedules in coordination with the Medicare Payment Advisory Commission (MedPAC), which is a 17-member group of diverse healthcare experts who are appointed for 3 years at a time to analyzing Medicare payments and other Medicare-related issues and then advising Congress on them. One of my health policy idols, Paul Ginsburg, is currently the Vice Chairman of MedPAC. (If anyone wants to introduce me to him, let me know.)

The Comptroller General is also assigned to do periodic audits on these relative values established for physicians’ services.

This title also establishes an Office of Primary Health Care within the Agency for Healthcare Research and Quality (known as AHRQ–I fondly know this agency as the one that funded my first two years of med school and then dropped my institution’s funding when I was about to start my full-time health policy PhD). This Office of Primary Health Care will be tasked with monitoring the number of PCPs and generally working to develop policies that improve the access to and implementation of primary care.

Lastly, the title talks about prescription drug prices. It says drug prices shall be negotiated annually by the Secretary. And the Secretary will develop a prescription drug formulary that promotes generic drug use and discourages the use of “ineffective, dangerous, or excessively costly medications when better alternatives are available.”

I wish I had a better sense for what the implications are of giving the Secretary power to adjust fee schedules and to involve MedPAC in the decisions. Does this mean the not-well-known but still highly criticized RVU Update Committee (known as the RUC, generally referred to as the secretive specialist-dominated group that sets the fee schedule that is, with little to no editing, implemented by CMS) will be a thing of the past? The RUC, by the way, is the reason why proceduralists are paid so much more than non-proceduralists–it’s easy to over-estimate the amount of time it takes to perform a procedure, which then translates into higher per-minute reimbursements to proceduralists.

From a high level, establishing a system of administrative pricing in this way, where smart individuals confer and do it rationally with good oversight and accountability, seems like a great idea. But remember that even the smartest experts will never be able to take all the factors into account that should determine a price. Not only are there different influencing factors that would make the price different in each locality, but also the knowledge of all the factors to get even one price right in one locality is dispersed over all individuals who deal with the service, its necessary inputs, and the alternative uses for those inputs. This is an insight from Friedrich Hayek, and I believe it correctly explains why administrative prices will never be efficient. Read more about that directly from Hayek here. I’ll have to write more on this in the future.

But short-term efficiency aside, I have explained in my Healthcare Incentives Framework how administrative prices also create a major barrier to healthcare evolving toward higher value.

So, maybe a different group of experts making prices with lots of oversight and transparency would be better than what we have now. I’m guessing it would be. But if these experts were willing to set these best-guess prices as price ceilings (allowing providers to choose to be reimbursed less than the set price) and then if Medicare could also somehow pass part of those savings on to the patients, this would overcome some of the issues caused by administrative prices. I’ve explained how this would work and why it’s important in my description of an optimal single-payer system article.

Continue to Part 5.


Evaluating Sanders’s Medicare for All Act of 2019, Part 3

This is my ongoing series summarizing and evaluating the Medicare for All Act of 2019, sponsored by Senator Sanders. Even though he is out of the running now for president, this Medicare for All (M4A) idea is gaining steam and will come back every few years with seemingly increasing popularity. People need to understand that there are quite a few implementation details of M4A that, if done wrong, will cause it to fail. This is yet another attempt of mine to help us avoid that if it does in fact eventually pass!

Part 1 reviewed Title 1, which states that basically everyone will be covered and can receive care from pretty much any provider. Part 2 reviewed Title 2, which states that insurance benefits will be comprehensive without any regular out-of-pocket expenditures.

Title 3

This title reviews which providers get to participate in M4A–any who meet state and federal requirements–and also outlines the rules of participation, which include the usual nondiscrimination requirements, no charging fees to patients, submission of proper statistical information, and submitting bills in a timely manner. It also includes the usual national standards for healthcare facilities.

It also says providers can enter into private contracts with patients (and sets forth in detail what needs to be written in that contract) as long as they’re not also receiving any reimbursement from M4A for those same services.

All necessary stuff, but really nothing to see here.

Title 4

This talks about how this law would be administered. The Secretary of Health and Human Services is granted the power to develop policies, procedures, guidelines, and requirements to carry out the act, including eligibility, enrollment, benefits, provider participation, and really anything I’ve already discussed in the prior titles. Nothing new here.

Title 4 does get interesting though. It also requires the Secretary to develop uniform reporting standards and then require providers to report on those things, including quality and outcomes (without “excessively burdening providers”). And it says this information will be made available for research purposes.

I like all of that. It’s the necessary groundwork for getting patients standardized quality information about providers, and it’s exactly what I have requested patients be given so that they can make good decisions and, thereby, reward better providers with more patients. Unfortunately, as discussed last week, there would be no cost sharing, so there will be no motivation to offer slightly lower quality at a drastically lower cost, but at least there would competition to optimize quality at the pre-specified level of reimbursement.

It then goes on to establish regional offices, which will be responsible for providing regular state health needs assessments, recommending changes in provider reimbursement, and establishing quality assurance mechanisms.

Ok, that’s it for this week. I am starting to think that, at the end of this series, I will need to write a list of recommended changes to this act–just the minimum necessary–to allow us to build an optimal M4A system. That should be fun!

Continue to Part 4.

Evaluating Sanders’s Medicare for All Act of 2019, Part 2

This is a 7-part series. Links here: Part 1, Part 3, Part 4, Part 5, Part 6, Part 7.

Before I get into the M4A Act, I want to update my assessment of how providers will fare with this whole coronavirus pandemic. I said they will love it because hospital beds will be full. I am aware of many more factors now that will be fighting against that increase in revenue from COVID-19 patients . . .

  • Most surgeries have been canceled, so ORs are sitting empty
  • Most outpatient clinics are closed
  • People are generally doing fewer things that lead to hospitalizations
  • Many caregivers are dependent on a continued stream of income, so hospital systems are trying to help them out by either continuing to pay them the same for less work (a personal example: as a hospitalist at a hospital where we have very few COVID-19 positive patients, I’m seeing about half the patients I usually do, but my pay per shift remains the same; we are feeling like it is the calm before the storm though, and I may make up for that by seeing many more patients than usual a few weeks from now) or are re-deploying them
  • Hospital systems are organizing testing sites and doing informational campaigns, all of which cost a lot of money too without much coming back

This does not mean providers are guaranteed to suffer a profitability loss this year compared to the counterfactual no-COVID-19 world. It depends on how many extra patients they end up getting from the pandemic, and the time course of which those patients are spread. Plus, a decreased demand for services now means there will be a lot of pent-up demand that will still be serviced after things calm down a bit. My best guess is that places that get hit hard with a high prevalence of COVID-19, especially early on, will do ok. But others, especially those still waiting for the surge of COVID-19 patients, will likely end up losing money from all this. I’ll be interested to look back a year or two from now and see how profitability turns out.


Now, back to the M4A Act. In Part 1, I said there are 11 titles, and I only looked at title 1. Let’s continue!

Title II

This title starts out by listing the benefits everyone gets under M4A. I could sum it up by saying it will cover . . . everything. Notable inclusions: psychiatric treatment, outpatient prescriptions, long-term care (home and community based), EMS, transportation for low-income or disable individuals, oral health, audiology, vision, and even alternative/complementary medicine (if it has evidence to suggest it’s useful). States can add more services if they want to cover additional things.

This does not talk about how they will decide whether a boderline more effective treatment that costs way more than the standard of care will be covered. But it does specifically talk about “experimental” treatments, which are defined as anything that is not consistent with accepted treatment guidelines. Experimental treatments may or may not be covered, it just depends on the Secretary, who will make a nationwide coverage determination for each one that is being considered.

This title also reviews cost sharing. There will be no cost sharing (no premiums, no copays, no coinsurance, no balance billing, etc.) except for a maximum of $200 out of pocket per individual per year, which would only take effect if someone is choosing a brand-name medication when there is a generic alternative available.

Finally, this title gives states the freedom to set additional standards of their own for benefits or eligibility or minimum provider standards, but it’s clear in stating that none of those state standards can result in restricted eligibility or benefits or access. I guess this is their way of allowing states to be even more generous in coverage or benefits, or to enact different provider standards as they see fit.

I’m planning an overview post at the end of this series that recaps all the key points, and I’ll talk more about cost sharing issues at that time, but this is the biggest area that will make or break a M4A system, and Sanders and Co. are getting it completely wrong. I understand they want to ensure people can afford treatment (I do, too!), and I understand they want it to be simple (I do, too!), but this kind of no-cost-sharing policy is going to prevent healthcare providers from innovating in ways that improve care quality and lower care costs. Which means it’s doing the opposite of its intended effect. I’ve described before the details of why appropriate cost-sharing policies in single-payer systems are so crucially important.

Continue to Part 3.

How Doctors Diagnose Things (An Explanation of COVID-19 Testing Criteria)

Image credit: xkcd.com

I’m going to pause in my evaluation of the Medicare for All Act of 2019 just for a week to write as a physician for once rather than as a health policy researcher. And not to talk about coronavirus (SARS-CoV-2) so much as to explain a principle of clinical medicine I wish more people would understand, especially now when it’s particularly relevant.

Let me explain to you how doctors diagnose things.

Any diagnostic effort a physician does starts with making a list of possible causes of the patient’s problem. That list is called a “differential diagnosis,” or a “differential,” for short. Only when you have determined your differential can you make decisions about how to proceed working up or treating a problem.

Together, the likelihood of all those things on the differential add up to 100%. If one of those things goes up in likelihood (say, because of a positive test for that thing), by definition the other things on the differential go down in likelihood.

So, for example, the patient I saw today. She hadn’t traveled anywhere recently, she hasn’t been exposed to anyone with COVID-19, and she doesn’t live in an area where there are many COVID-19 cases–all in all, she was very low risk for having COVID-19. But some food she ate yesterday didn’t sit well, and she vomited but also tried to take a breath at the same time. That didn’t work out so well, and she was trying to cough the vomit out of her lungs after that. About a day later, she was still coughing and short of breath, but now she was having fevers. COVID-19 was on the differential (cough, shortness of breath, fever), but bacterial pneumonia secondary to aspiration was much more likely. Did we need to test this lady?

With the information I’ve given you, the answer is probably no. We are pretty certain her symptoms were from that aspiration event, which makes COVID-19 very unlikely.

But some patients with that same story would still get tested (which was the case with this patient), as I’ll explain using the principle of a “testing threshold.”

Every item on the differential diagnosis sits somewhere on the probability spectrum in between 0% and 100%. If you test for the disease, and the test comes back negative, it pushes that one down closer to 0%. (How far it pushes it toward 0% depends on how reliable the test is.) And if the likelihood of something on the differential is close enough to 0%, then you say it’s unlikely enough that you can essentially think of it as being ruled out.

How close is “close enough to 0%”? Or, in other words, how unlikely does something have to be before we don’t feel the need to test for it further? Or, in other other words, how do we decide where to set that testing threshold? That depends on a few things, especially how risky it is to miss the diagnosis. If we’re dealing with the patient above, and I told you she’s a 25 year old with no medical problems and she works from her computer at home, it’s not very risky to miss the diagnosis, and we’d counsel her to make sure she’s isolated until a few days after all her symptoms have resolved. But if that patient is 80 years old and has severe COPD, this is an incredibly high risk individual, and missing a COVID-19 diagnosis, unlikely as it is, would be catastrophic, so we would definitely test her.

Similarly, young healthy healthcare providers are considered high risk because of the potential consequences of missing that diagnosis in them. The consequences are not to them directly, but rather the consequences are to their patients they could potentially spread it to, many of whom are likely elderly or high risk in other ways. Therefore, healthcare workers’ testing threshold is also set very low.

So, if you have symptoms, check testing criteria. Call a hotline. They will ask you questions to figure out where your testing threshold is, and based on that they will decide if you need to get tested or not.

Evaluating Sanders’s Medicare for All Act of 2019, Part 1

This is a 7-part series. Here are all the links: Part 2, Part 3, Part 4, Part 5, Part 6, Part 7.

I spent a lot of time looking at Senator Warren’s plans for Medicare for All (M4A) because she committed to a lot of details on her official campaign website. Senator Sanders, on the other hand, had very little. But he did commit to many details in his Medicare for All Act of 2019.

Bear in mind, this is him working as a senator–not as a president–so it’s hard to know how much this represents what he would push for as president, although I suspect it would change very little. And, at the time of this writing, it’s looking less and less likely that he will become the democratic presidential nominee, so maybe this is all moot. However, you may have noticed that M4A is becoming a bigger conversation every year, and people who once said it’s impossible are starting to rethink their assessments, so I’m going to move forward with evaluating this proposal anyway because I believe considering different possible implementations of a single-payer system in the US will become increasingly important to getting it right if it is in fact going to happen.

Let me also give you a reminder about my approach to these things. I’m biased, as everyone is, but even if you’ve read my writings for a while, you probably still do not know where I fall on many issues. This is on purpose. Maybe its my apolitical Canadian upbringing, but I feel strongly that people should reserve judgment on any issue until they have a good grasp of both sides. In these posts, I am neither arguing for or against M4A; I am simply trying to supply some of those pros and cons of different proposed implementations.

Having said all that, one bias I am upfront about is that I believe markets work. Put more precisely, I fall on the decentralized side of the economic spectrum,which, as a reminder, is independent of the welfare spectrum.

Now, on to my evaluation of the Medicare for All Act of 2019 (hereafter referred to as the Act). It has 11 titles, so let’s go through them one by one to see what kind of fun they contain. I’ll be focusing on the main details that will determine the overall structure of the system and how the healthcare system is likely to function.

Title I

This is the general stuff. Every resident and, from what I can tell, every non-resident too, will get benefits and be auto-enrolled and receive a Medicare card, at which point they will have the freedom to see any qualified healthcare provider. The only people who will not receive benefits will be those who are coming to the U.S. specifically to freeload off the free benefits.

Until the Act takes effect, people can continue any current health insurance. But, after that, no one will be allowed to sell coverage that duplicates the benefits provided under M4A. That doesn’t mean they can’t sell supplemental benefit plans though.

There will certainly be arguments about who should be covered by M4A, and, unsurprisingly, this falls on the “cover basically everyone” side of the spectrum. There are other options. I’m not an immigration expert, but it looks like there are four main immigration statuses in the U.S.: citizen, permanent or conditional resident, non-immigrants (because they’re only here temporarily with a visa), and undocumented. It might be easier to only send Medicare cards to citizens and residents. But, from the provider side, it sure would be nice to just treat everyone who walks in the door without regard to their immigration status. There’s also a charity aspect to consider here–how do we care for these people who are undocumented? I have a hard time with this because I want to provide compassion and improve others’ lives, but I also don’t want to reward illegal behaviors with free health insurance at the cost of taxpayers.

Straight up getting rid of employer-sponsored insurance is a great move and will enhance simplicity so much in the healthcare system and in the tax code, plus it will enhance job portability. Insurance should never have been paired with employment anyway–it was just an accident of historical policies.

Ok I’ll leave off right there for this week. If anyone has a strong argument one way or the other about covering undocumented people with M4A, please share below.

Continue to Part 2.

Price Transparency, In as Few Words as Possible

I’m ready to move on from everything being about coronavirus (although the memes have been very entertaining), so let’s talk more about price transparency this week. After that, as requested by a reader, I’ll spend some time looking at Senator Sanders’s Medicare for All Act of 2019 to get more details about what flavor of M4A he would push for as president (since, if you recall, his official campaign website details were pretty scant).

Months ago, I read this interesting Vox article about President Trump’s healthcare price transparency efforts. They asked a number of experts what they thought the results would be of these policies.

Let me summarize what they said:

  • Consumers will start shopping for and finding lower prices
  • High-priced providers will be shamed into lowering their prices
  • Policy makers would see how high prices actually are and would be more motivated to enact policies to reduce them
  • People still wouldn’t shop for healthcare services even with price information because (1) they can’t during emergencies, (2) they will often hit their deductible and therefore not end up paying more for more expensive providers anyway, and (3) patients will continue to go to the same providers even if they’re more expensive because they’ve already established a relationship with them
  • Price information will only be actionable when it’s in an easy-to-understand consumer interface plus paired with insurance benefit design changes
  • Without being paired with quality information, people might incorrectly assume the expensive providers are higher quality
  • Providers could see the prices insurers are paying other providers and demand they get those higher prices as well

All of those predictions are, to various degrees and in certain situations, likely to come true. But they don’t tell the whole story.

What would I say, in as few words as possible?

Price transparency, by itself, will only remove one of many barriers to people making price-sensitive decisions in healthcare–other barriers will remain, especially insurance plan designs that negate price differentials between providers via their cost-sharing requirements for patients. But, in the big picture, getting more price-sensitive decisions in healthcare is not the goal. The goal is to get as many purchase decisions as possible to become value sensitive, which requires knowledge of both price and quality. Only when patients start making value-sensitive decisions will higher-value providers start to win market share and enhanced profitability, thus stimulating innovation toward greater value over time. So while the short-term observable benefits of a price transparency policy will be minimal, it is one of many essential steps toward fixing incentives and improving value in our healthcare system.

Maybe that wouldn’t be short enough to be quotable, so instead they’d just say they asked Dr. Taylor Christensen, who said, “the short-term observable benefits of a price transparency policy will be minimal.”

Who Likes Coronavirus, Insurers or Providers?

face mask on blue background
Photo by Anna Shvets on Pexels.com

We’re in the midst of the coronavirus hype, and I think this provides a great opportunity to review incentives in the healthcare system. How do providers and insurers feel about this new pandemic?

Insurers are hating it. They are going to have a big bump in the number of people going to doctors and hospitals, which means they are paying a lot more money to providers in 2020 than they had anticipated. Insurer profits are going to tank. They would rather people be healthy–that’s how they are able to keep more money as profit. This is why I say that insurers’ only job is not to provide risk pooling, but also they are motivated to increase cost-saving prevention.

Providers are loving it. Hospital beds and emergency departments and urgent cares are all going to be full, which means profits will soar. Sure, salaried providers (me) and also providers paid per shift aren’t actually too happy about seeing more patients for no extra money, but the hospital administrators are all looking forward to large quarterly bonuses.

jobs and parties

And just as a little bonus to help you sound smart, let’s get some coronavirus terms straight (since it seems most media outlets can’t!) . . .

Coronavirus is a little family of viruses. There are four of them that commonly cause infections in humans, and I see them all the time because they’re one of the types of viruses that often cause upper respiratory tract infections (i.e., “the common cold”).

Every once in a while, another member of the coronavirus family figures out how to infect humans. The most famous one is what caused the whole SARS excitement in 2003. SARS stands for severe acute respiratory syndrome, because that’s the type of infection it caused. So they decided to name that member of the coronavirus family SARS-CoV (CoV, if you didn’t figure it out already, comes from coronavirus). I guess once a virus starts infecting humans, it’s worthy of receiving a new and improved name.

And now, in 2019, another one figured out how to infect humans. It causes a respiratory infection similar to the 2003 one, so they cleverly decided to name this new virus SARS-CoV-2.

Fix this in your brain. The virus is called SARS-CoV-2. Honestly, though, you can just refer to it as “coronavirus” because I’m pretty sure people will know which member of the family you’re talking about.

The disease SARS-CoV-2 causes, however, has its own name: coronavirus disease (#inspired). But, for short, they call it COVID-19 (because it started in 2019).

So, when you are talking about the virus, call it SARS-CoV-2, or, less precisely, coronavirus. And when you’re talking about the respiratory disease that virus causes, you should be saying COVID-19, or coronavirus disease.

Why Providers Don’t Innovate

The last couple weeks, I’ve been writing about how innovation can solve our healthcare spending problem and why it’s not happening. Last week, I gave some thoughts on why insurers don’t innovate. This week, let’s talk about providers.

One of my favorite examples that illustrates some of the challenges providers face when they try to innovate is detailed in the book Transforming Health Care: Virginia Mason Medical Center’s Pursuit of the Perfect Patient Experience. It talks about how they noticed that a lot of patients were presenting with low back pain and were not getting optimal treatment, so they decided to do something about it. They completely redesigned their low back pain care pathway, cutting out all the unnecessary things and getting patients the beneficial things much quicker. They started getting patients back to work way sooner, and things were going great, except for one problem: by cutting out unnecessary MRIs for uncomplicated cases, they were losing a lot of profit.

This happens a lot. Providers figure out how to deliver better care for patients, and then profitability suffers.

The solution for this specific issue is known. What if people, rather than buying a whole bunch of individual services that they hope will add up to a solution to their back pain, paid for a single product? They could buy the descriptively named “back pain fix.” This back pain fix product would include whatever was necessary (all the office visits, PT appointments, etc.) to get their backs feeling better. Then, when a healthcare system innovates and cuts out unnecessary services, they are keeping extra money in their pocket, so profitability actually improves!

This would be amazing, except for another problem that would arise. If only one insurer agrees to pay Virginia Mason for this “back pain fix” and the rest keep paying the traditional way, then they’re still losing money when treating patients with traditional-pay insurers. The lesson here is that not only do we need to pay for specific definable solutions to patients’ problems (often called “bundles”), but we also need to get all insurers to agree to start doing that at the same time.

This, by the way, is a problem I see over and over with provider innovations. Think about patient-centered medical homes. The doctor’s office usually needs to hire some sort of nurse coordinator who can be reaching out to patients to make sure they’re taking their medications and such, and this nurse’s salary is paid for by the “per-member-per-month” fee that insurers pay to doctor’s offices that are running medical homes. But when you only have 40% of your patients on insurance plans that are paying this monthly fee, you’re now either providing the service for free to the other 60% of your patient panel or you’re basically running two different clinics (a traditional fee-for-service one and a medical home one) within your single clinic, both of which are designed at odds with each other.

This makes sense you say, but then you remember that hospitals are paid by the DRG (basically a lump sum for the hospitalization, and the amount is determined by how sick the patient was). And since most insurer-hospital contracts are based on DRGs, you say, doesn’t this solve those two problems listed above?

Theoretically, yes. Except that hospitals are the most complex organizations devised by man, and also they do a horrible job accounting for their costs. So, yes, hospitals could innovate in ways that lower costs a bunch and make a killer profit (#pun), but there’s just too much complexity and too many different service lines and too much uncertainty about what things actually cost for them to make much headway in cost-lowering innovations. From a business management perspective, this is a nightmare situation for attempting meaningful change.

But when you have a simpler organization, these barriers go away. And that’s why we see stellar examples of higher quality and lower costs at specialty providers. For example, Shouldice Hospital for hernia repairs (located in Ontario, Canada, of all places!) has made quite a name for itself with its world-class outcomes and low costs.

So, what is needed for providers to innovate? We need to pay for the right products, unify incentives from insurers, simplify hospitals, and get hospitals to learn how to account for their costs.

But wait, there’s more. Even after all that, innovation will still be forever limited until we can ensure that the providers who successfully create value-improving innovations can be rewarded financially, which I’ve written about already here.

This turned into a mini three-part series on healthcare innovation, so I think it’s time for some closing thoughts.

Many people believe that the only solution to our healthcare spending crisis is a government takeover to start administratively lowering prices. This is one of the major arguments for Medicare for All, because “we’ve tried the private market, and clearly it hasn’t gotten it right.” But how much of a solution could Medicare for All be? If the government administratively forces prices down, it hits a hard stop once it has lowered prices so much that profits are 0%. Even if insurers and providers have an 8% profit margin, that means the max possible savings with administrative pricing is 8%. And this does nothing to “bend the cost curve” over time.

The solution, then, needs to be (1) finding ways to prevent more care episodes and (2) lowering the actual cost of delivering care (for the care episodes that couldn’t be prevented).

Over the last 3 weeks, I have shown that, to achieve those two goals, we need to be relying on innovations by insurers and providers. The innovations we need are not happening much right now, but if we can get the incentives right, the barriers to those innovations will go away. (And remember that a single-payer system can be compatible with getting the incentives right.)

How much could these provider-led and insurer-led innovations save us? More than 8%? Based on other industries’ results when incentives are aligned properly, I have reason to believe our healthcare spending curve could flatten, and possible even eventually start angling down. The potential impact of fostering innovation has no comparison to those simplistic administrative pricing approaches that are completely ignorant of how markets work.

Why Insurers Don’t Innovate

Last week, I described how providers and insurers are the parties in the healthcare system that we need to lean on to start innovating in ways that actually bend the cost curve. And it would seem that they have all the incentives in the world to do this, because any innovation that they can do that lowers their cost means they are keeping more money in their pocket (assuming prices are fixed). But there are some challenges.

This week, let’s look at insurers.

Remember that total healthcare spending is a function of two things: the number of care episodes, and the cost of each of those care episodes. Insurers try to lower the cost of care episodes by covering fewer things (benefit exclusions, prior authorizations) and negotiating for lower prices, but they’re fairly limited in their control over that variable. They have more opportunity to reduce the number of care episodes by keeping people healthy (yes, it does always come back to my Healthcare Incentives Framework). If they can accomplish this, all that money they avoided paying out to providers stays in their pocket.

Brief rant: That last sentence is not strictly true. The Affordable Care Act, in an effort to prevent insurers from price gouging, included a provision that requires insurers to pay out 80% or 85% (depending on the market) of the premium money they receive to providers to pay for care, which would theoretically prevent unreasonable profits by forcing them to limit how high they can raise their prices. This seems like a great idea until you realize a few things. First, if an insurer does a great job preventing care episodes, they may end up having to pay a bunch of that money back to enrollees as rebates, so this puts a ceiling on the financial benefits of innovations that lower medical spending, thereby reducing innovation in this area. Second, small insurers don’t have the luxury of millions of covered lives over which they can spread overhead, so this has put some smaller insurers out of business, thereby concentrating the market even more than it was before. Third, the solution to a market problem is not to control prices like this, but to identify what is interfering with competitive pricing and get rid of that. Sure, there have been billions of dollars of rebates paid out, but at the cost of creating new market distortions that will further interfere with true long-term price-lowering solutions.

Anyway, here are two other reasons insurers don’t innovate more to lower the cost of care:

  • Patients don’t like it: When an insurer starts getting too aggressive about trying to send people to your house or change how you live your life, this gives that insurer a bad rap. And in the absence of really good price and quality information about different insurers, people rely heavily on reputations, so it’s very important for insurers to preserve their reputations.
  • The rewards for taking a big risk to innovate in ways that prevent care episodes are small: An insurer can definitely invest a lot of money trying some new program that could keep people out of hospitals, but it’s a big risk to take, so the potential rewards also have to be big. But when they start thinking about how much money the initiative will cost, the likelihood of it saving more than it costs, and the risk of them having to pay back money for rebates if they save too much money, the benefit starts to seem pretty small. Not only that, but also they can’t reassure themselves that, even if the net savings per enrollee are small, it will allow them to lower their premiums and outprice their competitors and win a larger percentage of market share. Why? Because people shopping for healthcare insurance typically have too many variables to think about, so it gets confusing and they end up assuming a lower-priced insurance plan must be cheaper because it’s covering fewer things.

All of these problems are solveable to a great extent. It requires getting rid of the ACA medical loss ratio requirement and instead getting better information to people shopping for health insurance, which would allow them to better identify higher-value insurance plans and rely less on insurer reputations in their selections.

Then, when an insurer does a great job innovating in a way that lowers the number of care episodes, that insurer will be motivated to lower their prices of their own volition and will be assured that new customers will flock to them, thus forcing other insurers to do a better job innovating themselves, and the cost-curve-bending will have begun.

How Can Innovation Lower Healthcare Spending?

I write a lot about how to decrease our inordinate spending on healthcare, and this week I want to clarify a little bit how I see this actually working. This requires me to define a couple terms:

  • Active demand: Demand that is being fulfilled. In other words, we’re expending resources to fulfill a need.
  • Latent demand: Demand that is not yet being fulfilled. It’s something people want and would be willing to expend resources to get, but there is just no technological or pharmaceutical solution to fulfill that demand. For example, activating latent demand could mean finding a treatment for a disease that has no treatment as of yet, or it could mean finding a better (usually more expensive) treatment for a disease that already has other treatment options.

When innovation activates latent demand, it usually increases spending because it’s allowing us to do more things for more people. But about innovation that doesn’t activate latent demand?

Think about provider-led innovation. Providers can only take the medicines and devices available to them and figure out how to apply them to patients as efficiently as possible. When they innovate, they are finding new ways to apply those things more efficiently. Thus, provider-led innovation usually lowers healthcare spending.

Think also about insurer-led innovation. Insurers are paid a fixed premium every month by their enrollees, and if they are able to innovate in ways that prevent care episodes (say, by hiring a community health worker to visit high-risk patients and keep them out of the emergency department), they end up keeping that unspent money in their pocket. So insurer-led innovation also usually lowers healthcare spending.

If providers and insurers can innovate to lower healthcare spending, why is innovation one of the primary drivers of increasing healthcare spending? Because, the way incentives are set up right now in our healthcare system, there are huge rewards available for anyone who comes up with a new medicine or medical device (pharmaceutical companies, medical device companies, etc.), but there are minimal rewards for providers or insurers that find ways to apply those innovations more efficiently to patients.

I’ll talk more next week about why providers and insurers don’t innovate more.